Fama-French three-factor model

The thesis tests the Fama and French Three-Factor Model on the Croatian stock market. The performance of the model is compared with that of the Capital Asset Pricing Model. Based on previous attempts of researchers to apply the three-factor model of Fama and French to developing markets, three different portfolio constructing procedures were chosen and compared. Additionally, the implications of using two different proxies for the market and two different return intervals are studied and compared. Overall, the size and the book-to-market factor add to the explanation of the cross-section of average stock returns provided by the market factor. Fama and French Three-Factor Model explains the cross-section of average stock returns in the Croatian market and provides a greater explanatory power in comparison with the Capital Asset Pricing Model. However, much of the common variation in stock returns still remains to be explained by additional factors that reflect the defining characteristics of the emerging markets.Rad testira Fama-French trofaktorski model na Hrvatskom tržištu dionica. Performansa modela uspoređena je sa performansom CAPM-a. Na temelju prethodnih pokušaja primjene trofaktorskog modela Fame i Frencha na tržišta u razvoju, odabrana su i komparirana tri različita postupka formiranja portfelja. Nadalje, proučavaju se i usporeduju implikacije upotrebe dvaju različitih proxyja za tržište i dva različita intervala povrata. Sveukupno, veličina kompanije i book-to-market faktor dodatno doprinose nivou objašnjenje varijacije presjeka prosječnih povrata iznad onog koji daje sam tržišni faktor. Fama-French trofaktorski model objašnjava presjek prosječnih povrata dionica na hrvatskom tržištu i objašnjava veći dio varijacije u povratima nego CAPM. Ipak, preostao je dio zajedničke varijacije u povratima dionica koji bi se mogao objasniti dodatnim faktorima koji odražavaju ključna obilježja tržišta u razvoju